LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Appellate Attorney Los Angeles
LIABILITY UPDATE
March 7, 2008
In Edmondson Property Management v. Kwock 2007 Daily Journal D.A.R 15967, the Fifth Appellate District of the California Court of Appeal held that a landlord’s obligation to indemnify its property manager under a Type II indemnity agreement did not bar an equitable contribution claim brought by the landlord’s insurer against the manager’s insurer.
A personal injury action was filed after a seven-year-old child fell off the roof of a storage shed located adjacent to the apartment she shared with her mother and on property owned by Lin Kwock (Kwock). Kwock employed Edmondson Property Management (Edmondson) to manage the apartment complex where the child lived. Both Kwock and Edmondson were named as defendants in the personal injury action. Kwock was insured by California Capital Insurance Company (Capital). Edmondson was an additional insured under the Capital policy by virtue of its role as property manager. Additionally, Farmers Insurance Group (Farmers) insured Edmondson under a general business liability policy. Capital defended Kwock and Farmers and Capital shared the defense of Edmondson in the personal injury action. Ultimately, the lawsuit settled within Capital’s policy limits, but Farmers refused to contribute to the settlement, claiming that the indemnity provision of the property management agreement rendered its coverage excess and to require contribution would be to nullify the indemnity agreement.
Edmondson filed a cross-complaint in the personal injury action against Kwock for indemnification, subrogation, and declaratory relief, asserting that the indemnity provisions of the property management contract governing their relationship required Kwock to fully indemnify Edmondson. The personal injury action settled pursuant to a negotiated agreement in which Capital paid $550,000 to the plaintiffs. The agreement, while disclaiming all liability for the child's injuries, apportioned the liability as follows: $50,000 from Kwock and $500,000 from Edmondson. Capital negotiated the agreement on behalf of both Kwock and Edmondson, and the agreement resolved all claims against these two individuals. The agreement did not resolve the cross-complaint filed by Edmondson against Kwock.
Capital then filed an action against Farmers seeking subrogation, contribution, and indemnity for the amount paid to settle the personal injury action. Farmers filed a cross-complaint seeking equitable subrogation and indemnification for the amounts it expended in defense of the personal injury action. The two were consolidated and tried before the trial court on a stipulated statement of facts and documentary evidence.
In its judgment, the trial court found (1) that the indemnity provision in the property management agreement was a “Type II” provision, indemnifying Edmondson only for passive negligence; (2) because Edmondson had knowledge that the child had played unsupervised on the roof of the shed and had not acted to prevent the fall, its alleged negligence was active, not passive, and the indemnity provision did not apply; (3) that Farmers’s policy was not intended to be an excess policy; (4) both policies bore the same level of liability; and (5) each was liable for 50 percent of the settlement paid. Farmers appealed, and the Court of Appeal affirmed.
The appellate court noted that a “Type II” provision was classified as a “general” indemnity clause in Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622. “It is characterized that way because it does not explicitly address the issue of the indemnitee’s negligence. (Id. at p. 628.) These clauses may be interpreted to cover an indemnitee’s passive negligence, but generally will not include an indemnitee’s active negligence. (Ibid; see also MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413, 419-420.)”
The “crux of the issues” presented on appeal was whether the indemnity provision found in the property management contract precluded Capital from seeking contribution from Farmers for the settlement paid. The appellate court observed that, generally, when multiple insurance carriers insure the same insured and cover the same risk, each insurer may assert a claim against a coinsurer for equitable contribution when it has undertaken the defense or paid a liability on behalf of the insured. Equitable contribution is not a matter of contract and exists independently of the insured’s rights under the policy. “ ‘It is not based on any right of subrogation to the rights of the insured, and is not equivalent to “ ‘standing in the shoes’ ” of the insured . . .’ ” (Hartford Casualty Ins. Co. v. Mt. Hawley Ins. (2004) 123 Cal.App.4th 278, 288.)
Farmers rested its contrary argument on the indemnity provision in the property management agreement. It argued that Farmers and Capital did not equally and concurrently share the liability generated by the child's injury because, pursuant to the negotiated indemnity provision, Kwock assumed the obligation of providing insurance for this particular risk, making Capital the primary insurer and Farmers the excess insurer. “According to Farmers, to hold otherwise would nullify the indemnification provision of the property management agreement. . . . In other words, although Farmers’s policy was written as a primary policy, the contract between Kwock and Edmondson defeats an equitable claim for contribution.” The Court of Appeal rejected this argument.
The appellate court looked to the language of the agreement negotiated between Edmondson and Kwock. The contract provided in a section titled “Owner’s Obligations” as follows: “Owner shall indemnify and save the Agent harmless from any and all costs, expenses, attorney’s fees, suits, liabilities, damages from or connected with the management of the property by Agent, or the performance or exercise of any of the duties, obligations, powers, or authorities herein or hereafter granted to Agent. [¶] Owner shall not hold Agent liable for any error of [judgment], or for any mistake of fact or law, or for anything which Agent may do or refrain from doing hereinafter, except in cases of willful misconduct or gross negligence.”
The court agreed with the trial court that the cited language is a general-indemnity provision and did not expressly address whether Kwock would fully indemnify Edmondson against third-party claims generated as a result of Edmondson’s own negligence. It also agreed with the trial court that the second quoted paragraph did not convert the general language of the first paragraph into an express agreement to indemnify even in cases of active negligence.
The court went on to reject Farmers’s argument that whether the indemnity provision was a Type II or Type I provision was a red herring in this case because the underlying action settled without a determination of the liability issue. “[T]he insurance company seeking to defeat a claim of equitable contribution must prove that the indemnification agreement would bar any recovery between the insureds before it can successfully claim equitable contribution would negate the negotiated contract between the insureds.”
In the absence of any contractual provision converting Farmers’s primary policy to an excess policy, we agree with the trial court and will affirm its application of the general rules of equitable contribution. Since both Farmers and Capital issued primary insurance policies covering the same risk at the same level of insurance, Farmers must pay its fair share of the liability paid by Capital in settlement of the personal injury action. The trial court apportioned the responsibility to 50 percent for each party. The apportionment has not been challenged on appeal, and we see no reason to disturb the trial court's conclusion that this is a fair apportionment.
----Andrea Lynn Rice
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Appellate Attorney Los Angeles
LIABILITY UPDATE
March 7, 2008
In Edmondson Property Management v. Kwock 2007 Daily Journal D.A.R 15967, the Fifth Appellate District of the California Court of Appeal held that a landlord’s obligation to indemnify its property manager under a Type II indemnity agreement did not bar an equitable contribution claim brought by the landlord’s insurer against the manager’s insurer.
A personal injury action was filed after a seven-year-old child fell off the roof of a storage shed located adjacent to the apartment she shared with her mother and on property owned by Lin Kwock (Kwock). Kwock employed Edmondson Property Management (Edmondson) to manage the apartment complex where the child lived. Both Kwock and Edmondson were named as defendants in the personal injury action. Kwock was insured by California Capital Insurance Company (Capital). Edmondson was an additional insured under the Capital policy by virtue of its role as property manager. Additionally, Farmers Insurance Group (Farmers) insured Edmondson under a general business liability policy. Capital defended Kwock and Farmers and Capital shared the defense of Edmondson in the personal injury action. Ultimately, the lawsuit settled within Capital’s policy limits, but Farmers refused to contribute to the settlement, claiming that the indemnity provision of the property management agreement rendered its coverage excess and to require contribution would be to nullify the indemnity agreement.
Edmondson filed a cross-complaint in the personal injury action against Kwock for indemnification, subrogation, and declaratory relief, asserting that the indemnity provisions of the property management contract governing their relationship required Kwock to fully indemnify Edmondson. The personal injury action settled pursuant to a negotiated agreement in which Capital paid $550,000 to the plaintiffs. The agreement, while disclaiming all liability for the child's injuries, apportioned the liability as follows: $50,000 from Kwock and $500,000 from Edmondson. Capital negotiated the agreement on behalf of both Kwock and Edmondson, and the agreement resolved all claims against these two individuals. The agreement did not resolve the cross-complaint filed by Edmondson against Kwock.
Capital then filed an action against Farmers seeking subrogation, contribution, and indemnity for the amount paid to settle the personal injury action. Farmers filed a cross-complaint seeking equitable subrogation and indemnification for the amounts it expended in defense of the personal injury action. The two were consolidated and tried before the trial court on a stipulated statement of facts and documentary evidence.
In its judgment, the trial court found (1) that the indemnity provision in the property management agreement was a “Type II” provision, indemnifying Edmondson only for passive negligence; (2) because Edmondson had knowledge that the child had played unsupervised on the roof of the shed and had not acted to prevent the fall, its alleged negligence was active, not passive, and the indemnity provision did not apply; (3) that Farmers’s policy was not intended to be an excess policy; (4) both policies bore the same level of liability; and (5) each was liable for 50 percent of the settlement paid. Farmers appealed, and the Court of Appeal affirmed.
The appellate court noted that a “Type II” provision was classified as a “general” indemnity clause in Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622. “It is characterized that way because it does not explicitly address the issue of the indemnitee’s negligence. (Id. at p. 628.) These clauses may be interpreted to cover an indemnitee’s passive negligence, but generally will not include an indemnitee’s active negligence. (Ibid; see also MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413, 419-420.)”
The “crux of the issues” presented on appeal was whether the indemnity provision found in the property management contract precluded Capital from seeking contribution from Farmers for the settlement paid. The appellate court observed that, generally, when multiple insurance carriers insure the same insured and cover the same risk, each insurer may assert a claim against a coinsurer for equitable contribution when it has undertaken the defense or paid a liability on behalf of the insured. Equitable contribution is not a matter of contract and exists independently of the insured’s rights under the policy. “ ‘It is not based on any right of subrogation to the rights of the insured, and is not equivalent to “ ‘standing in the shoes’ ” of the insured . . .’ ” (Hartford Casualty Ins. Co. v. Mt. Hawley Ins. (2004) 123 Cal.App.4th 278, 288.)
Farmers rested its contrary argument on the indemnity provision in the property management agreement. It argued that Farmers and Capital did not equally and concurrently share the liability generated by the child's injury because, pursuant to the negotiated indemnity provision, Kwock assumed the obligation of providing insurance for this particular risk, making Capital the primary insurer and Farmers the excess insurer. “According to Farmers, to hold otherwise would nullify the indemnification provision of the property management agreement. . . . In other words, although Farmers’s policy was written as a primary policy, the contract between Kwock and Edmondson defeats an equitable claim for contribution.” The Court of Appeal rejected this argument.
The appellate court looked to the language of the agreement negotiated between Edmondson and Kwock. The contract provided in a section titled “Owner’s Obligations” as follows: “Owner shall indemnify and save the Agent harmless from any and all costs, expenses, attorney’s fees, suits, liabilities, damages from or connected with the management of the property by Agent, or the performance or exercise of any of the duties, obligations, powers, or authorities herein or hereafter granted to Agent. [¶] Owner shall not hold Agent liable for any error of [judgment], or for any mistake of fact or law, or for anything which Agent may do or refrain from doing hereinafter, except in cases of willful misconduct or gross negligence.”
The court agreed with the trial court that the cited language is a general-indemnity provision and did not expressly address whether Kwock would fully indemnify Edmondson against third-party claims generated as a result of Edmondson’s own negligence. It also agreed with the trial court that the second quoted paragraph did not convert the general language of the first paragraph into an express agreement to indemnify even in cases of active negligence.
The court went on to reject Farmers’s argument that whether the indemnity provision was a Type II or Type I provision was a red herring in this case because the underlying action settled without a determination of the liability issue. “[T]he insurance company seeking to defeat a claim of equitable contribution must prove that the indemnification agreement would bar any recovery between the insureds before it can successfully claim equitable contribution would negate the negotiated contract between the insureds.”
In the absence of any contractual provision converting Farmers’s primary policy to an excess policy, we agree with the trial court and will affirm its application of the general rules of equitable contribution. Since both Farmers and Capital issued primary insurance policies covering the same risk at the same level of insurance, Farmers must pay its fair share of the liability paid by Capital in settlement of the personal injury action. The trial court apportioned the responsibility to 50 percent for each party. The apportionment has not been challenged on appeal, and we see no reason to disturb the trial court's conclusion that this is a fair apportionment.
----Andrea Lynn Rice
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